LAM15200 - Excess expenses, losses and deficits: Introduction to loss reform CTA10/Part 5A CTA10/ Part 7A

Loss reforms were introduced from 1 April 2017 by Finance (No 2) Act 2017.

Broadly speaking carried forward losses can now only reduce taxable profits (after deduction of in-year reliefs and the deductions allowance ) by a maximum of 50% rather than to nil. The deductions allowance CTM05210 may be claimed to increase the maximum set-off by up to £5M.

As part of the reforms there was a relaxation in the use of carried forward losses arising on or after 1 April 2017 which makes them available to set against a company’s total profits or to surrender as group relief. Five types of loss are affected. These are trade losses, non-trading loan relationship deficits (NTLRDs), non-trading losses on intangible fixed assets (NTLIFAs), management expenses and UK property business losses.

BLAGAB trade losses carried forward must first be used to reduce any BLAGAB trading profits of the period before they are available to set against other profits. Any post- 1 April carried forward BLAGAB trade losses remaining after the mandatory set-off are available to set against total profits (FA12/S124B) or can be surrendered as group relief (CTA10/PT5A as applied by FA12/S125).

The relaxation and the loss restriction rules do not apply to excess management expenses referable to BLAGAB and BLAGAB NTLRDs, NTLIFAs and property business losses that are all treated as deemed management expenses.

CTM05000 onwards provides further details on the general rules for setting carried forward losses against total profits where a company does not carry on BLAGAB. These rules are modified when a company carries on BLAGAB The modified rules are set out in LAM15210. For 1 April 2017 to 5 July 2018 the rules were different and these are covered in in LAM15400 onwards

A claim for set-off of carried forward losses against total profits must be made within 2 years of the end of the accounting period for which relief is claimed. For management expenses and trading losses, including BLAGAB trade losses, the investment activity or trade must be carried on in the period for which relief is claimed. Additionally, for trades which are not BLAGAB, the trade must not have become small or negligible CTA10/S188BD.

As for other carried forward losses and deficits which arose before 1 April 2017, BLAGAB trade losses which arose before 1 April 2017 can only be set against future profits from the same source i.e. BLAGAB trade profits.

For carried forward losses which are not BLAGAB trade losses ,where there is no claim for set-off of carried forward losses which arose after 1 April 2017 against other profits they are automatically set against profits of the same source CTM04860. The set-off of carried forward BLAGAB trade losses against BLAGAB trade profits is mandatory even if there is a claim to set carried forward losses against other profits.

The loss restriction rules are switched off where the loss which is carried forward is a shock loss. Carried forward shock losses are not available for set-off against total profits and cannot be surrendered as group relief. See LAM15300 onwards for further details on shock losses.